Apr 25, 2009

Lihir: A Turnouaround Story In The Making

Lihir has been a frustrating story in the past, despite their gem mine, which the company is named after. The management has finally cleaned up their act just in time for coming bull rally in gold. They have been troubled from transportation to energy, delaying numerous projects and squandering capital.  In order to avoid this turning into a reccomendation, I wish to mention why I think it is currently mispriced by the market.

This story is compelling to me for these reasons

* lihir island - is expected to produce 775k-840k oz in 2009 and reach 1m/oz yr by 2011. The remaining mine life based on current reserves is 18-20 years. But there sucess with lihir in terms of converting m&i to reserves, leads me to the conclusion they should convert an additional 10m of the 36m oz of net resources to reserves. 

 *Bonikro mine - 125k 155k oz in 2009 in addition to to other operating mines expected to produce 100-150 combined. The first year of production began in 2008, therefore production will accelerate over the next few years. There are some caveats: the upside could be substancial and it is highly likely the mines not in production in addition to Bonikro wiill lead to a mid to large increase in reserves over the coming years. The downside, however, lies in the fact these mines are located in west africa go obviously political risk may pose a problem.

*A large portion of their assets both producing and exploration lie in a politically safe area of australia or in favorable geopolitical areas. Including the infamous Ballarat mine, which had dissapointed investors expectations, but 2008 showed significant improvement  in production and the potential of the mine in general. 

In Short,  Lihir is trading at a fairly big discount to its peers, yet production will ramp up dramatically up from 2008. The overall risk has declined in operations, both in continuous production of their mines and the transformation of their balance sheet. Cash costs will be between 400-425/oz for the next 4-5 years. It is also a pure play on gold when compared the number 1 miner in australia (newcrest) which gets more or less 80% of total revenue from gold. I mention this in light over the hype going on with teck conmico which is a great story as well.

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